MUMBAI: The new Reserve Bank guidelines on Basel III-compliant additional tier-1 (AT-1) bonds have partially reduced the default risks for many state-run banks like Central Bank, IOB and United Bank, who had negative distributable reserves under the earlier guidelines. This will have positive reserves under the new norms, says a report by rating agency Icra.

While three of the 21 state-run banks -- Central Bank of India, Indian Overseas Bank and United Bank of India -- had negative distributable reserves as percentage of their risk weighted assets at -0.69, -1.63 as per the earlier guidelines, respectively, but under the new guidelines the same will turn positive at 0.39, 0.66 and 2.72, respectively, notes Icra.

This can help ensure that these three banks can avoid the imminent risk of default on the coupon payments. As of September 2016, the statutory distributable reserves of 21 state-run banks, excluding the five SBI associates, stood at around Rs 1.28 lakh crore.

Despite the risks associated with these instruments, the banks have sold AT-1 bonds aggregating to over Rs 46,000 crore (PSBs Rs 39,000 crore) till date of which around Rs 28,100 crore (PSBs Rs 21,600 crore) has been raised in the current fiscal alone, says the report.

"Under the new guidelines that include the profit/loss reported by PSBs during the first half of fiscal 2017, the reserves that are now available for servicing the coupon have increased by 2.9 times to Rs 2.72 lakh crore from Rs 94,000 crore in September 2016" says Karthik Srinivasan, a senior vice-president at Icra.

"The revised guidelines by the Reserve Bank on Basel III-compliant additional tier-1 (AT-1) bonds have strengthened the banks' ability to service the coupons, thereby partially reducing the risks associated with such instruments," Srinivasan added.

Banks are required to appropriate 25 per cent of their annual net profit towards statutory reserves.

According to another rating agency Crisil, the total reserves available with state-run banks to service AT1 bond coupons, under revised guidelines, is nearly double at Rs 2.34 lakh crore from Rs 1.24 lakh crore earlier.

The reserves available for AT-1 coupon servicing, under the new norms, include the reserves representing appropriation of net profits - which include statutory reserves, capital reserves on sale of investments, other capital reserves--special reserves and revenue and other reserves, adjusted for accumulated losses and deferred revenue expenditure.

The development that came in last Friday assumes importance as the Budget 2018 has allocated just Rs 10,000 crore capital infusion into state-run banks, while the actual requirement for them till FY2019 is around 1.8 trillion.

"Public sector banks' capital requirements is in the range of Rs 1.5-1.8 lakh crore till FY19 of which only Rs 65,000 -75,000 crore can be by way of AT-1 issuances," he said, adding thus the new norms will enable weaker banks like CBI, IOB and United Bank to raise capital through AT-1 instruments.

If a bank reports losses, the revised guidelines allow it to service the AT-1 coupons by additionally dipping into the reserves created through appropriation of profits (including statutory reserves, capital reserves created from sale of investments and special reserves) as against earlier guidelines that allowed only utilisation of distributable reserves (revenue reserves and surplus in P&L account).

The new RBI circular also removes the ambiguity on definition of distributable reserves as it specifically states that the accumulated losses should be set off while computing the reserves eligible to service these bonds.

"With the risk on these instruments reducing post the revised guidelines, we expect an improved investor appetite leading to more issuances of AT-1 bonds at lower coupons in the near to medium-term," said Srinivasan.

This can also help state-run banks increase the proportion of AT-1 instruments at lower costs to meet their capital requirements at least over the near-term.

However, Icra maintains that the sustainability of the profitability and internal capital generation will continue to remain the key driver for the credit profile of the banks.

As per Icra, based on the Q2 profits, the new distributable reserves for Allahabad Bank will be 4.51 per cent from 1.42, Andhra Bank's at 4.52 per cent from 1.82, BoB at 5.99 per cent from 2.29, BoI at 3.78 per cent from 0.75, BoM at 2.54 per cent from 0.66, Canara Bank at 6.05 per cent from 1.89.

For Corporation Bank it will be at 5.44 per cent from 1.67, Dena Bank at 3.51 per cent from 0.97, IDBI Bank at 2.65 per cent from 1.31, Indian Bank will have the highest at 10.51 per cent from 6.28 which is also the highest, Oriental Bank at 5.75 per cent from 2.43, PNB at 6.20 per cent from 3.07, Punjab & Sind Bank at 5.86 per cent from 3.61.

The largest lender SBI's reserves will more than double to 5.22 per cent 2.16 per cent, while that of Syndicate it will be 4.79 per cent from 2.30, Uco Bank at 1.97 per cent from 0.24, Union Bank at 5.83 per cent from 1.89 and Vijaya Bank at 5.17 per cent from 1.98.

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